Online tax law could open state to challenge

A U.S. Supreme Court ruling Thursday that online retailers can be required to collect sales taxes in states where they don’t have a physical presence appears to be a boon for Hawaii’s tax coffers under a bill Gov. David Ige signed into law last week stipulating that online businesses with significant sales are subject to Hawaii’s general excise tax.

But despite Hawaii’s new e-commerce law in anticipation of the court ruling, local tax attorneys caution the state could still face legal challenges in collecting those taxes because of its unique tax structure and what now look like flaws in signed legislation.

In Wayfair Inc. vs. South Dakota, the Supreme Court upheld a South Dakota law requiring online merchants to charge customers state sales tax if it has annual gross sales in the state of at least $100,000 or it conducts 200 business transactions a year.

The ruling addressed longstanding concerns from states that they were losing out on tax revenues as online shopping has exploded. While local tax experts said that they didn’t know what Hawaii’s annual losses might be, the Supreme Court ruling estimated that on the whole states were losing out on up to $33 billion in tax revenues annually. Meanwhile, brick-and- mortar stores have complained that they are at an unfair advantage because their online competitors can lure customers with tax-free purchases.

The Supreme court ruling was not unequivocal, however, in allowing states to collect taxes from online retailers. The ruling specified that the South Dakota law was permissible because it provided a reasonable degree of protection to small online merchants that could be unduly burdened by having to comply with multiple state tax requirements. The South Dakota law set thresholds for the amount of business the company must be conducting in the state and stipulates that the law is not retroactive in collecting taxes.

Furthermore, as cited by the court, South Dakota is a party to the Streamlined Sales and Use Tax Agreement, under which states agree to comply with a standardized and simplified sales tax administration system to reduce the burden of tax compliance. The agreement, which two dozen states have signed on to, was reached specifically to allay concerns that it’s too difficult for companies to comply with all the different sales tax regulations of various states.

While Hawaii modeled its law, Senate Bill 2514, now Act 41, on South Dakota’s law, there are differences. Like South Dakota, Hawaii requires that a company have at least $100,000 in gross annual sales or conduct 200 business transactions a year. However, Hawaii did make the law retroactive — the law goes into effect on July 1 and applies to the beginning of this calendar year — and the state is not party to the streamlined sales tax agreement. This could be a problem if a company wants to challenge Hawaii’s law.

“This ruling clarified what the battle lines are going to be when there is challenge of the Hawaii law — and I say when there is a challenge, not if there is a challenge,” said Ron Heller, an attorney at Torkildson Katz Hetherington Harris &Knorek, who specializes in tax law and business disputes relating to accounting and financial issues.

Tom Yamachika, president of the Tax Foundation of Hawaii, agreed that Hawaii’s law could be problematic. Yamachika said that Hawaii would have to amend its tax laws significantly to join the streamlined tax agreement. That’s because Hawaii’s general excise tax has three separate tax rates — one for retail sales, one for wholesale sales and one for insurance commissions. To comply with the Streamlined Sales Tax Agreement, the state must administer only one tax rate, Yamachika said.